The emerging threat to personal finances in a cashless world: Paying with plastic doesn’t feel as painful as cash

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As a graduate student, Avni Shah used to buy her coffee with her debit card. One day she forgot it at home so she paid for her daily coffee with cash, but she noted two peculiar things about the experience. It felt more painful to hand over physical cash than it did to pay with plastic. And the coffee tasted better.

Fast forward to today. Dr. Shah is now an assistant professor of marketing and a research fellow with the Behavioural Economics in Action at Rotman (BEAR) research cluster at University of Toronto. She is also one of the world’s leading experts in how the pain of paying for things influences how much we spend and how we feel about what we’ve bought.

“The ‘pain of payment’ is the psychological disutility or aversion that individuals have when they have to part with their money," Dr. Shah says. “But there are two components to a transaction. Not only do you have the pain of payment, but you also have the pleasure of consumption. The tighter these two components are coupled, the more you feel that pain.”

As we move toward a more cashless society, this area of research has important implications. If paying for things with dollars and cents hurts more than paying with plastic or online, what does that mean for Canadian consumer spending and saving patterns?

Don Wright, a recently retired investment broker in Pickering, Ont., has never used a bank machine in his life. He cuts up the debit cards his banks send him and uses cash whenever possible.

“I carry cash because it felt like it was more real to me whenever I had to buy something,” Mr. Wright said. “If you’re buying a new stereo for $500 and you’ve got to whip out 10 $50 bills and count them out there in front of the clerk, it just seems a little bit more real than just signing your name on a piece of paper.”

He only uses a credit card for transactions that require them, such as booking a cruise or hotel, or paying for car repairs.

Dr. Shah noted that earlier work in this field looked at how using credit cards influences the pain of payment. The payment doesn’t show up until up to 30 days later when you get your credit card statement. Because the temporal coupling is very loose, the connection of the exchange of the pain of payment for whatever we’ve consumed is weakened.

She also notes that when you pay with plastic, either a debit card or a credit card, and no matter if you swipe it or tap it, you get it back physically unchanged. But when paying with cash, you either get nothing back, or something that is very visibly different if receiving change.

“Paying with plastic doesn’t really feel as vivid, as salient, or as painful as cash,” Dr. Shah said.

But why did the coffee she bought with cash taste better than ones bought with plastic? It was her usual brew, and the price was no different. What was different is that she experienced more pain at the time of the transaction. And if we are willing to experience that pain, it might be because what we bought was worth it.

Our society’s shift away from dollars and cents and toward plastic payment has important implications. Dr. Shah notes that when we learned about money as kids, one thing that was valuable was being able to see money – think piggy banks, clear jars – and conceptualize it more concretely. From a financial literacy perspective, physical cash is king. If the next generation isn’t as exposed to physical money growing up, they may have less understanding about all things financial.

But there are certainly some positive aspects to a more digital world. Saving money can feel less painful too. We know that one of the most powerful strategies people can adopt is to make their savings automatic by setting up a regular transfer into another digital account. We barely feel that after a few months.

More and more financial institutions are making round-up apps available. If you make a purchase, you can round up the transaction to an even dollar amount and chip away slowly at a saving or investing goal. We could also set up alerts to notify us if we are early in a pay period, but tracking to spend more than our budgets allow.

Dr. Shah has some advice for managing your budget in a cashless society. “For savings or even spending on the things that we need to, such as our bills, we should make it easier to part with money. But for our more pleasurable, hedonic and indulgent spending, we should be more conscious and increase that pain.”

Money-savvy Canadians should take advantage of automation for retirement savings and necessary expenses, but pay for little luxuries in cash. It’ll hurt more, but it’ll be worth it.

This is the latest from a multi-part series that looks at Canada’s movement toward a cashless society.